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The Push for Digitalization in Power and Utilities: 2018 Outlook

Several years into the electric power industry’s technology, regulatory, and competitive transformation, the sector has profoundly changed, using “smarter” grids and cleaner electricity and offering greater customer choice. An examination of short- and long-term change drivers reveals how the industry will likely look in the future and how to manage it. First, six key near-term change drivers:

Changing generation fuel mix. U.S. power generation sourced from non-hydro renewables (largely wind and solar) has nearly doubled, from around 5% in 2012 to almost 10% in 2017. About 50 gigawatts of coal-fired generation capacity has been retired since 2012.¹ Natural gas’s annual share of U.S. power generation surpassed coal for the first time in 2016, and was about even with coal in 2017 (at roughly 31% each). Low natural gas prices played a major role in the shift and are also behind a steady decline in wholesale power prices.

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Declining power prices. Since 2014, wholesale power prices have fallen across U.S. independent system operators (ISOs) and regional transmission operators (RTOs), including about 56% in the ISO New England, 50% in the New York ISO, and 47% in the PJM RTO, which serves 14 mid-Atlantic and Eastern Seaboard states.² These savings have nearly offset record-breaking utility capital expenditures for upgrading, modernizing, and decarbonizing the grid. Moreover, declining power prices make price increases in customer bills resulting from new capital investments far less noticeable.

Despite current federal policy initiatives, the electric power industry is expected to stay the course toward cleaner energy sources. Almost all planned generation capacity for the next five years is renewable or natural gas-fired because wind, solar, and natural gas are often the lowest cost resources. Experience and research have also shown they’re what utility customers want.

Increased distributed energy resource (DER) penetration. Use of DER—on-site and decentralized power generation using small devices connected to the grid—will likely continue to increase and affect more aspects of utility planning than any other trend. Whether it’s distributed generation, energy storage, micro grids, electric vehicles, smart appliances, or demand response, residential and commercial electricity customers see these products and services as saving them money, reducing their carbon footprints, and boosting reliability and resilience. Initially, many utilities and system operators saw DERs as intermittent or otherwise unreliable, but more are now beginning to explore how DERs, when paired with technologies such as smart inverters and advanced distribution management systems, can add flexibility and resilience to the grid. And resilience is a key goal in light of recent severe storms. Energy storage also holds the promise to boost flexibility and resilience, either at grid scale or as a DER. If new DER-owning “prosumers” (producing customers) who are now feeding electricity back to the grid begin to receive payment or credits for the grid services they provide, customer engagement and willingness to explore other new utility products and services will likely rise.

Big bets on renewables. Despite federal government efforts against clean energy initiatives, customer enthusiasm for renewables is growing. The Deloitte Resources 2017 Study of U.S. business and consumer energy use and attitudes has found increased interest in renewables every year since 2012. In the study, 44% of residential respondents said they were extremely/very interested in purchasing solar panels, and 41% were similarly interested in purchasing a share in a community solar installation. For millennials, those percentages were even higher: 64% and 53%, respectively.

Given a choice in electricity suppliers, nearly 60% of residential consumers cited renewable sources as a reason to switch. Almost half of Fortune 500 corporations now have a target for either sustainability or renewable energy or both. Even for those that don’t, renewables are often the lowest-cost option and allow corporations to lock in energy prices and avoid price volatility. From 2012 through late 2017, corporate buyers contracted nearly 10 gigawatts of renewable energy. The market is expanding beyond large multinationals and technology companies to include smaller organizations in a variety of industries. As the price of battery storage declines, solar customers are increasingly combining storage with solar, providing flexibility for themselves and possibly for the entire grid.

Strengthened calls for resilience yielding results. In the wake of 2012 Superstorm Sandy and the 2017 hurricanes that hit Texas, Florida, Puerto Rico, and the U.S. Virgin Islands, electric utilities and their customers are more determined than ever to protect the grid from severe weather events. After Sandy, utilities spent tens of billions of dollars to harden physical grid assets and deploy smart technologies to avoid future outages and speed recovery. Since then, 70 million smart meters have been installed nationally to provide greater visibility into the location of outages. Drones help survey storm-struck areas to assess and aid restoration efforts. These technologies, combined with industry and government information sharing and public contact via social media, have cut outage duration in Florida and elsewhere. Despite this progress, customers may not always take notice; they just know their power is out and may not realize that it was restored more quickly than usual. Many utilities are meeting growing customer demand for resilience by providing distributed (often renewable) generation, storage, and microgrids.

Deep commitment to cyber and physical security risks. In a 2017 survey, utility respondents rated “physical and/or cyber grid security” as the most important issue they face, after ranking it sixth in the two previous years. Bad actors are increasingly successful at breaching corporate and government information and operating systems, including those that control electricity grids. The proliferation of smart energy assets and their increasing decentralization and interconnection creates more entry points for malevolent actors. Electric utilities are working together and with the U.S. government to detect, prevent, and prepare for these risks. The most proactive utilities perform risk assessments and develop cybersecurity programs and road maps, often aided by the National Institute of Standards and Technology or the North American Electric Reliability Corporation. And many have begun sharing intelligence and pledging mutual assistance in cooperation with federal government agencies, typically through the Electricity Subsector Coordinating Council.

Long-Term Trends

Utilities face continued uncertainty as the industry continues to transform. But some bright spots are on the horizon that can help chart the path forward. The projected demand lift from transport electrification and the potential benefits of digitalization are two of the most promising.

A dawning age of electric vehicles. Although electric vehicles (EVs) accounted for just 1% of U.S. and global light-duty vehicle purchases in 2016, sales are growing rapidly. Customer interest is rising as prices fall, driving ranges increase, and the “cool” factor mounts. Momentum will increase around the world as a result of targeted policies and initiatives; for example, China, the U.K., France, and India have all announced plans to phase out fossil-fuel-powered vehicles in the next two decades.

Bloomberg New Energy Finance projects annual global electricity consumption from electric vehicles could rise 3,000-fold, to 1,800 terawatt hours (TWH) by 2040 from 6 TWH in 2016. While that projection is quite optimistic, trends toward shared, autonomous vehicles and EV adoption rates could accelerate since the two are complementary.

And utility benefits are not limited to increased electricity demand: A burgeoning fleet of EVs with onboard batteries could help utilities balance the grid, integrate renewables, and improve power quality, while potentially enhancing customer engagement.

Digital transformation. Digital technologies can help power companies predict, manage, and control increasingly decentralized and complex networks. They also support more informed decisions and improve customer relationships. Digital transformation creates a set of interconnected, data-driven solutions that move from traditional monitoring to intelligence and active control. Here are a few examples:

—Generation will evolve toward a more diverse and decentralized network of lower capacity and more flexible units with the intelligence to self-ramp, self-balance/stabilize, and self-diagnose. Comprehensive monitoring, intelligence, and automated controls that increase the efficiency of generating heat—one of the biggest uses of power—will improve availability and demand responsiveness.

—Electricity asset owners, prosumers and consumers will be able to price and trade energy among themselves in decentralized markets through a transactive energy system, which allows energy agents to buy and sell based on market value without causing interruptions to the grid. Technologies such as blockchain and smart contracts will decentralize coordination between parties through distributed optimization and control.

2017 was a year marked by multiple well-entrenched trends, including the changing fuel mix, declining power prices, increasing customer demand for renewables, the proliferation of DER and strengthened commitment to boost resilience and cybersecurity. This year should see increasing digitalization as electric power companies map out new ways to deploy rapidly advancing technologies. In the longer term, power companies can look forward to positive momentum as car buyers increasingly consider electric vehicles. And, regardless of the time frame, the electric power industry will continue to be guided by its central mission—to provide customers with secure, reliable, resilient, affordable and environmentally responsible electricity.

1. Based on historical coal-fired power plant capacity data from SNL Energy, accessed November 2017. U.S. coal-fired capacity reached a peak of 309,000 MW in 2012 and is projected to fall to 259,000 MW by the end of 2017.
2. “SNL Spot Power Index: on-peak monthly average price,” SNL Energy, accessed November 2017. Note: Compared annual averages for 2014 with 2017 average through October.

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